MONEY MARKET INSTRUMENTS

PRESENTED BY:SONIKA(30-MBA-06)

MONEY MARKET

CHARACTERISTICS OF MONEY MARKET INSTRUMENTS
• Short-term borrowing and lending. • Low credit risk. • High liquidity. • High volume of lending and borrowing.

Money market Instruments
• • • • Eurodollars Treasury Bills Federal bonds Municipal bonds

Eurodollars
• Eurodollar: U.S. dollars held as deposits in foreign banks • Corporations often find it more convenient to hold deposits at foreign banks to facilitate payments in their foreign operations • Can be held in U.S. bank branches or foreign banks Risk: • They are not subject to reserve requirements • Nor are they eligible for FDIC depositor insurance (U.S. government is not interested in protecting foreign depositors) • The resulting rates paid on Euro dollars are higher (higher risk) Trading: • Over night trading as in the Federal Funds market • Eurodollars are traded in London, and the rates offered are referred to as LIBOR (London Interbank Offered

Treasury Bills
• T-bills are short-term securities issued by the US Treasury to raise money from public. • They are issued with three-month, six-month and one-year maturities. • T-bills are purchased for a price that is less than their par value; • One of the few money market instruments that are affordable to the individual investors. • T-bills are usually issued in denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million.

• Treasury Bills are sold by single price auctions held weekly. • If you want to buy a T-bill, you submit a bid that is prepared either non-competitively or competitively. • T-bills are considered to be the safest investments . • They are exempt from state and local taxes. • return are less because Treasuries are exceptionally safe. • Investment characteristics of treasury bills:– – – – Default risk Liquidity Taxes Minimum denomination

Federal Funds
• Short-term funds transferred (loaned or borrowed) between financial institutions, usually for a period of one day. • Used by banks to meet short-term needs to meet reserve requirements (over night). • Banks loan because they would not make any interest at all on excess reserves held with the Fed. • Banks may borrow the funds to meet the reserves required to back their deposits. • Participants in federal funds market include commercial banks , savings and loan associations , government sponsored enterprises , branches of foreign banks in the US , federal agencies and

Fed funds rates and T-bill rates 1990 through 2004

Municipal Bonds
• Bond issues by a state , city , or other local govt. or their agencies. • The method and practices of issuing debt are governed by an extensive system of laws and regulations , which vary by state. • The issuer of the municipal bond receive a cash payment at the time of issuance in exchange for a promise to repay the investor over time. • Repayment period can be as short as few months to few years. • Bond bear interest at either fixed or variable rate of interest. • Interest income received by bond holders is often exempt from the federal income tax and income

• Investors usually accept lower interest payments than other types of borrowing. • Municipal bond holders may purchase bonds either directly from the issuer at the time of issuance or from other bond holders after issuance. • Municipal bonds typically pay interest semi-annually. • Interest earnings on bonds that fund projects that are constructed for the public good are generally exempt from federal income tax. • But , not all municipal bonds are tax-exempt. • Municipal bonds may be general obligations of issuer or secured by specified revenues.

Comparing Money Market Securities : A comparison of rates

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